Greetings. Welcome Veeco Instruments, Inc. First Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to your host, Anthony Pappone, Head of Investor Relations. You may begin.

Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and John Kiernan, our Chief Financial Officer. Today's earnings release is available on the Veeco website. Please note that we have prepared a slide presentation to accompany today's webcast. We encourage you to follow along with the slides on veeco.com. This call is being recorded by Veeco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veeco's express permission. Your participation implies consent to our recording. To the extent that this call discusses expectations about market conditions, market acceptance and future sales of the company's products, future disclosures, future earnings expectations or otherwise makes statements about the future, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These factors are discussed in the Business Description, Management's Discussion and Analysis and Risk Factors sections of the company's report on Form 10-K and annual report to shareholders, in our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and press releases. Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call, to reflect future events or circumstances after the date of such statements. During this call, management will address non-GAAP financial measures. Information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performance, is available on our website. With that, I will turn the call over to our CEO, Bill Miller.

Thank you, Anthony. Good afternoon, everyone, and thank you for joining our call today. Veeco executed well in Q1 with solid top- and bottom-line results. Our team continues to perform well and remains focused on executing our growth strategy to create value for our customers and shareholders. Today, I'll take you through our first quarter highlights and discuss our markets and technologies. John will provide a financial update and guidance, and then we'll be happy to take questions. Revenue in Q1 came in at $154 million, non-GAAP operating income totaled $20 million, and non-GAAP diluted EPS came in at $0.30, all above the top end of our guided range. This quarter's results reflect solid execution. Revenue for our semiconductor products remained elevated, increasing by 20% year-over-year, led by laser annealing. Our team did an excellent job of managing supply chain during the quarter. While material lead times remained elevated, our suppliers' on-time deliveries have improved. We're starting to see some signs that material lead times could improve in the second half of the year. As we look ahead in 2023, we remain committed to investing in the semiconductor and compound semiconductor markets with differentiated solutions positioning Veeco for long-term growth. Now switching gears to our markets and technologies. As we've discussed in the past, there are four key megatrends driving growth in our 3 primary markets of semiconductor, compound semiconductor and data storage. These trends are high-performance computing and AI, mobility and the immersive user experience, the transformation of the automobile industry and the cloud. Turning first to the semiconductor market. Our strategy is to expand our served available market by delivering differentiated solutions at the leading edge. We accomplished this with three key technologies. First, our laser annealing product line, which reduces thermal budgets at advanced nodes is gaining…

Thanks, Bill, and good afternoon, everyone. Today, I'll be discussing non-GAAP financial data and would encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the quarterly earnings presentation. Turning to Q1 revenue by market and geography. Revenue totaled $154 million for the quarter, while flat to the prior quarter, coming in above the high end of our guidance. This was driven by sales to our semiconductor customers, which increased 20% year-over-year. Our semiconductor business comprised 60% of total revenue, in line with the prior quarter with significant contribution coming from our laser annealing product line. The compound semiconductor market contributed to 14% of our revenue versus 16% of revenue in the prior quarter. System shipments for photonics applications were the primary contributor of revenue for the quarter. Moving along, our data storage business totaled 14% of revenue versus 11% of revenue in the prior quarter. And scientific and other made up 12% of our revenue, similar to last quarter. Now looking at quarterly revenue by region. As expected, revenue from China was higher in Q1 as compared to prior quarters, totaling 40% of revenue. This increase was primarily driven by LSA systems to trailing edge customers. While China revenue in Q2 is forecasted to remain elevated, we expect a sequential decline from Q1 and a further decline in the second half of the year. Revenue from our Asia Pacific region, excluding China, totaled 25% of total revenue, led by semiconductor system sales. The United States came in at 20%. And finally, EMEA was 15% of total revenue for the quarter. Looking forward to the second half of the year, we expect revenue growth to be led by Tier 1 advanced semiconductor and data storage…

[Operator Instructions]. Our first question comes from the line of Tom O'Malley with Barclays.

I just wanted to walk through, obviously, your products have longer lead times, but there are certain areas where you can take advantage of some quick turnarounds. Obviously, with the much better numbers you've seen an improvement a little quicker than you originally expected. Could you just point to the specific areas where you are seeing that improvement? And do you think that's more of a cohort of demand where people are looking to capitalize in the short term? Or do you see a sustained recovery here where you've already kind of seen the bottom of this short-term downturn.

Thanks for the questions, Tom. I think as we look at Q1 as it compared to our initial guide, there were really 2 things that drove the higher revenue, an additional semiconductor system, LSA system and an additional data storage system. And I would say that those were on the fence of either happening at the end of Q1 or the beginning of Q2 and we included them in our guide more or less happening in Q2. So we don't see anything structurally changing there or particularly in some of the areas where we have less visibility.

I guess I'll just add, John, that in the -- you mentioned kind of the shorter lead time products like lithography or wet processing. We aren't seeing any recovery there, particularly in lithography. I will say, though, that we are starting to have a little more discussions -- more encouraging discussions with our customers for projects either later in the year or in 2024. So that's about the first positive thing we've been able to say in litho for the last 6 to 9 months.

Helpful. And then I just kind of wanted to square away the data storage guidance versus what we're seeing in the market. Western Digital is reporting tonight, and Seagate already reported and are talking about sequential downtick in HDDs. Seagate mentioned that they wouldn't see a recovery until Q4. Could you talk about what that means in terms of capital spend? They've already kind of taken down guidance there, but -- are you seeing an additional wave of weakness from those customers? Or are they still spending on plan versus what you expected entering the year?

Tom, I would say, clearly, we're seeing the softness, having excess capacity and burning down inventory. I would say that is negatively impacting our spare parts and our service revenue business here in the short term, modestly. We'll have to kind of wait and see how that inventory gets burned off and when that happens. Our outlook for the second half increase in data storage is really driven by the orders that we actually have in backlog and are building now for the second half of the year. And we've recently confirmed those ship dates. That's what gives us the ability to have a higher second half.

Helpful. And let me just sneak 1 more in, if I may. You guys have been pretty helpful about giving some segment detail into the June quarter. Could you just talk about sequentially through your business segments, what you're expecting to get to the midpoint of guidance?

Yes, Tom. So we're expecting a fairly similar quarter overall, but some changes in the makeup by market. So we are expecting semi to be up in Q2. And call it, closer to the $105 million range. We're looking at compound semi in the $25 million range. These are all at the midpoint of our guide. Data storage, as we talked about, the first half, we see exactly as we initially planned out. But as I just mentioned earlier, we had one more system shipment in Q1. So we now are expecting Q2 to be more in the $15 million range, but the first half being right on schedule. And scientific, we sort of see in the $10 million range or so in Q2.

Our next question comes from the line of Rick Schafer with Oppenheimer.

This is Wei Mok on the line for Rick. Congrats on the quarter and the recent LSA announcements. I believe this is your first entry into the DRAM memory space. I was wondering if you could help us size this market? And how does it compare to the logic market? And when do you expect to ship your first system?

Thoughtful question, Wei. I would say we're really excited about the opportunity in DRAM. It's been a fair amount of work to get these follow-on orders. We size each customer, each application at each step kind of in the $25 million to $35 million range over a 12- to 24-month period of time. So we now have one customer and one application. We expect to start shipping tools, I think in this quarter right now, the second quarter and throughout the rest of this year. So hopefully that gives you a little bit of color on that.

Great. Appreciate it. As for my follow-up, it looks like the equipment and the design win is going to be manufactured in your new San Jose facility that you expanded into last year. I was just wondering if you can kind of walk through how much capacity do you have at this facility? And do you have enough ample space to support this new order?

Yes and yes. So the new space in San Jose, as a reminder, gave us the opportunity in the same overall square foot building to double our manufacturing or more than double our manufacturing output. And we have not reached that capacity at this point. So yes, for the -- for this business that we're planning on for this year and going into next year, the San Jose facility has adequate capacity.

Our next question comes from the line of Gus Richard with Northland.

Yes. Just in terms of MOCVD and GaN, I know you've had an evaluation system out there for a while in Asia. And I think you've been talking to customers about MOCVD for GaN. And I was just wondering if you could kind of give us an update on what you're seeing in that market? And what's the opportunity over the next 12 to 18?

Yes. We do have an evaluation system for GaN power electronics. It's for the transition from 6-inch to 8-inch. The product is running, and we're in a competitive situation there. Our customers asked us to extend that evaluation through this year, which we are going to do. And so it's a little slower taking off than we had originally planned, and we're still working on it. I would say we probably won't see any meaningful gain on silicon power activity beyond where we are today until the 2024 time frame. That being said, we also have GaN on silicon for micro LED, where we're working with a few customers on opportunities there. and that continues to develop as well for GaN silicon.

Our next question comes from the line of Dave Duley with Steelhead Securities.

My first is about LSA. You mentioned you had customers, I guess, plural that you won new applications from -- in the foundry and logic space. I was just wondering if you could elaborate a little bit more about that?

Yes. In our press release, we used customers because we had follow-on volume orders for our third logic customer. So it's a first volume win there in foundry logic. And we also had a win in DRAM with multiple tool orders. So those are the two customers that we have specifically, one from foundry logic and one in memory.

Okay. So it wasn't two new wins in the foundry and logic space?

No. It was one new win in foundry logic and one in memory.

Okay. Great. A little bit topic to silicon carbide. You've made this acquisition. And I thought you've talked about, if I'm not mistaken, having a demo later just late this calendar year. Could you help us understand the size, the market opportunity that you're chasing in the silicon carbide marketplace? And who the key competition is for this deposition tool I guess, that you're talking about?

Yes. So according to Yole, they're sizing the silicon carbide device market at $2 billion going to about $6 billion in 2027, and the corresponding epitaxy equipment market is about $250 million these days going to about $0.5 billion by 2027. There are a few participants in that market today, namely ASMI, and then NuFlare and Aixtron are our competitors in that space?

Okay. And -- was it accurate that you will have a demo later this year? And then when would you expect to have, I guess, meaningful revenue from this particular opportunity?

Yes. Thanks for reminding me the first half of your question. I would say right now, we are shipping our demo tool from Sweden to our demo lab in Somerset, New Jersey. As we speak, we're going to be facilitizing it. And our plan is to be demo ready in the second half of the year. We've met with a number of the Tier 1 and Tier 2 players in this market. They're all very excited about the acquired technology with our worldwide service footprint is very intriguing to them. And so we're pretty much at the key milestone of having to have the demo tool put down films that can be measured and sent to our customers. And then we would expect to have eval systems for some Tier 1s in 2024 and then also start selling directly to some Tier 2 customers as well. So I think we're planning for some modest revenue in '24, but I wouldn't think -- I think we have more meaningful revenue in 2025.

Okay. And -- thanks for giving the competitive layout. Who would you say is the leader in this space now? And I would imagine you're going to have to show a fairly significant cost of ownership advantage versus whoever that leader is, what would be the key reasons that you can show a superior cost of ownership?

There's -- the market actually varies pretty significantly by region or what tier. So we do understand cost of ownership is critical as well as yield, and yield plays a big part in that. And so from our discussions with our customers, they do see an opportunity for us to have a cost of ownership advantage over what's available in the market today.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to CEO, Bill Miller for closing remarks.

Thank you. I do want to thank our customers and shareholders along with the Veeco United team for their continued support as we execute our growth strategy. Have a great evening, everyone. Thank you.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.